Xunlei Limited (XNET) Q1 2024 Earnings Report, Transcript and Summary

Welcome, ladies and gentlemen, and thank you for your patience. You've joined Xunlei's First Quarter 2024 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I'd now like to turn the call over to the host, Investor Relations Manager, Ms. Luhan Tang.

Good morning, everyone, and thank you for joining Xunlei's Q1 2024 Earnings Conference Call. With me today are Eric Zhou, CFO; and Hu Lee, VP of Finance. Our IR website has our earnings press release available to supplement our prepared remarks during the call. Today's agenda includes our prepared opening remarks from Chairman and CEO, Mr. Jinbo Li, on Q1 operations highlights, followed by CFO, Mr. Eric Zhou, presenting financial results detail and our revenue guidance for Q2 2024, before we open up the floor to your questions in a Q&A session. Please note that this call is recorded and can be replayed on our Investor Relations website at ir.xunlei.com. Before we get started, I would like to take this opportunity to remind you that the discussion today will contain certain forward-looking statements made under the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. Such statements are based on management's current expectations under current market conditions that are subject to risks and uncertainties that are difficult to predict, which may cause actual results to differ materially from those made in the forward-looking statements. Please refer to our SEC filings for a more detailed description of the risk factors that may affect our results. Xunlei assumes no obligations to update any forward-looking statements except as required under applicable law. On this call, we'll be using both GAAP and non-GAAP financial measures. A reconciliation of non-GAAP and the comparable GAAP measures can be found in our earnings press release. Please note that all numbers are in U.S. dollars, unless otherwise stated. Now the following is the prepared statement by Mr. Jinbo Li, Chairman and CEO of Xunlei Limited. Good morning, and good evening, everyone. Thank you all for joining us today. We have kicked off 2024 with our Q1 revenue, meeting our expectations and maintaining quarterly profitability, driven by improved gross margin and increased gross profit. During the first quarter, we achieved $80.4 million in revenue, representing a growth of 4.2% compared to the previous quarter, but a decline of 19% year-over-year. As we continue to navigate the impact of the downside of our domestic audio live streaming business since June 2023, we anticipate its impact on our year-over-year quarterly financial comparisons will gradually fade away in the second half of this year. Despite the evolving market conditions, we believe that our business continues to exhibit resilience and we are optimistic about operations in 2024. Let's talk about our first quarter operations. Our subscription revenue achieved a remarkable milestone, reaching $33.1 million, which represents a year-over-year growth of 12.9%. This outstanding performance can be attributed to both an increased number of subscribers and a higher conversion rate among premium subscribers. The rise in the subscriber base is primarily driven by implementation of more effective marketing promotions as well as the seasonal impact of Chinese New Year holiday. By continuously enhancing product features and collaborating with strategic partners to retain and acquire users, we generally expect continued development of our business, although we may encounter short-term fluctuations from time to time. In the first quarter of 2024, our cloud computing business generated a revenue of $30.2 million, reflecting a decline of 1.2% quarter-over-quarter and 7.8% year-over-year, respectively, primarily attributed to intensified pricing competition and reduced sales volume of hardware devices. However, we are encouraged that we had a more than 6-fold quarter-over-quarter increase in the sales of OEA, a more affordable line of hardware device in our product portfolio. We provide several choices of products to cater users' different needs. Now let's turn to our live streaming and internet value-added services. We generated $17.1 million in revenue, representing an increase of 13.7% quarter-over-quarter and a decrease of 54.1% year-over-year, respectively. The decrease was due to the impact of downsizing our domestic audio live streaming business started last June, and we expect the impact will continue to affect our top line comparisons for a few more quarters. To mitigate its impact, we have been expanding our international operations as well as incubating new products and businesses to accelerate business development. In the second half of 2024, we intend to make bold efforts to transform our businesses. Among our strategic initiatives, we will embrace the centralized and AI-driven technologies, and harness their capabilities to enhance our operational efficiency, enrich user experiences and gain competitive advantages. As AI emerges as a revolutionary technology that will profoundly impact our life, we acknowledge the challenges ahead and have confidence in making progress in our endeavor given Xunlei's rich heritage of innovation and entrepreneurial spirit. We're in early phase of innovation and strategic execution, and I look forward to providing more information and sharing with you our progress in the near future. With that, I'll turn the call over to Eric. Eric will cover the financial results in detail and provide our revenue guidance for the second quarter of 2024.

Thank you, Luhan, and thank you all again for participating in Xunlei's conference call to discuss the financial results of the first quarter of 2024. In the first quarter, total revenues were $80.4 million, representing a decrease of 19% year-over-year. The decrease was mainly attributable to the decreased revenue from our live streaming business as a result of the downsize of our domestic audio live streaming operations since June 2023. Revenues from cloud computing were $30.2 million, representing a decrease of 7.8% year-over-year. The decrease was mainly due to the decreased revenues from certain of major customers of cloud computing services as well as the decreased sales revenue of cloud computing hardware devices. Revenues from subscriptions were $33.1 million, representing an increase of 12.9% year-over-year. The increase was mainly driven by the increase in the number of subscribers. The number of subscribers was 5.76 million as of March 31, 2024, compared with 4.84 million as of March 31, 2023. The average revenue per subscriber for the first quarter of 2024 was RMB 39.5 million compared with RMB 41 million in the same period last year. The lower average revenue per subscriber was due to more promotional activities we conducted during the first quarter of 2024. Revenues from live streaming and other IVAS were $17.1 million, representing a decrease of 54.1% year-over-year. The decrease of live streaming and other IVAS revenues was mainly due to the downsize of our domestic audio live streaming operations since June 2023. Costs of revenues were $37.1 million, representing 46.2% of our total revenues compared with $59.3 million or 59.8% of the total revenues in the same period of 2023. The decrease in the cost of revenues was mainly attributable to the decreased revenue sharing costs for our live streaming business, which was consistent with a decrease in live streaming revenues. Bandwidth costs, as included in cost of revenues, were $27.1 million, representing 33.8% of our total revenues compared with $29.1 million or 29.3% of the total revenues in the same period of 2023. The decrease was primarily due to the decreased bandwidth usage for the development of innovative products and a decrease in sales revenue of our cloud computing services during the quarter. The remaining cost of revenues mainly consisted of the cost related to the revenue sharing costs for our live streaming business, payment handling charges, cost of inventories sold, and depreciation of servers and other equipment. Gross profit for the first quarter of 2024 was $42.8 million, representing an increase of 8.2% year-over-year. Gross profit margin was 53.3% in the first quarter of 2024, compared with 39.9% in the same period of 2023. The increase in gross profit was mainly driven by the increase in the gross profit of our subscription business, and the increase in gross profit margin was mainly attributable to the increased percentage of subscription revenues to total revenues, which has a high gross profit margin as well as the decreased percentage of live streaming revenues to total revenues, which had a relatively lower gross profit margin. Research and development expenses for the first quarter of 2024 were $17.6 million, representing 22% of our total revenues, compared with $18 million or 18.2% of our total revenues in the same period of 2023. The decrease was primarily due to the decrease in employee compensation incurred during the quarter. Sales and marketing expenses for the first quarter of 2024 were $10.1 million, representing 12.5% of our total revenues, compared with $9.3 million or 9.4% of our total revenues in the same period of 2023. The increase was primarily due to more marketing expenses incurred during the quarter for our subscription and overseas live streaming businesses as part of our ongoing efforts on user acquisition. G&A expenses for the first quarter of 2024 were $11.1 million, representing 13.9% of our total revenues, compared with $11.7 million or 11.8% of our total revenues in the same period of 2023. The decrease was primarily due to the decreased share-based compensation expenses, partially offset by the increase in labor costs during the quarter. Operating income was $4 million compared with an operating income of $0.7 million in the same period of 2023. The increase in operating income was primarily attributable to the increase in gross profit from our subscription business during the quarter. Other income was $0.3 million compared with other income of $1.4 million in the same period of 2023. The decrease was primarily due to onetime write-off, a long-term investment, and a decrease in subsidy income received during the first quarter of 2024. Net income was $3.6 million compared with $1.2 million in the same period of 2023. Non-GAAP net income was $4.5 million in the first quarter of 2024, compared with $5.5 million in the same period last year. The increase in net income was primarily attributable to the increase in the gross profit of our subscription business, partially offset by the decrease in other income as discussed above. The decrease in non-GAAP net income was primarily attributable to the increase in labor costs as compared with the same period of 2023. Diluted earnings per ADS in the first quarter of 2024 was approximately $0.06 as compared to $0.02 in the same period of 2023. As of March 31, 2024, the company had cash, cash equivalents and short-term investments of $272.5 million, compared with $271.9 million as of March 31, 2023. The increase in cash, cash equivalents, and short-term investments was mainly due to the net cash from operations and proceeds from bank borrowings, partially offset by repayment of bank borrowings, spending on share buybacks, and payments for long-term investments during the first quarter of 2024. Now turning to our share repurchase program. In June 2023, Xunlei announced that its Board of Directors has authorized repurchase of up to $20 million of its shares over the next 12 months. As of March 31, 2024, the company has spent approximately $4.7 million on share buybacks under the share repurchase program. Finally, for our revenue guidance, for the second quarter of 2024, Xunlei estimates total revenues to be between $79 million and $84 million, and the midpoint of the range represents a quarter-over-quarter increase of approximately 1.4%. This estimate represents management's preliminary view as of the date of this press release, which is subject to change, and any change could be material. Now we conclude prepared remarks for the conference call. Operator, we are ready to take questions.

[Operator Instructions] Our first question comes from the line of [ Yajing Guo ] from Ping An Insurance.

[Foreign Language]

She stated that [indiscernible] the record revenue for the subscription business, and she observed a decline in the number of subscribers this quarter compared with the previous quarter. She would like to know some insights into the current strategy for subscription business and our approach to acquire new users. Thanks for asking. The decline in the number of subscribers in the first quarter of 2024 was due to the seasonal impact of the Chinese New Year holidays. Currently, we are implementing a multifaceted strategy to enhance users' loyalty and faster collaborations with various online platforms and strategic partners to acquire new users. Generally speaking, we expect to maintain a relatively stable user base and product revenue, although we may incur fluctuations from time to time. Going forward, our focus will remain on building a robust and sustainable ecosystem, enhancing user benefits, iterating more features to boost the user engagement, and expand user base. Thank you.

[Foreign Language]

[Foreign Language]

The question is, according to the first quarter earnings press release, you mentioned that the decrease in live streaming revenues was because Xunlei had downsized its domestic audio live streaming business since June 2023. I wonder how much this will continue to affect your future earnings, and if Xunlei plans to resume these operations in the future? Thanks for asking. We have already completed downsizing of our domestic audio live streaming business, and the impact on our future financial results will be minimal, if any, on sequential basis, and we don't have any plans right now to resume this business. Instead, we will focus on expanding our operations overseas to mitigate the impact of this business adjustment. Thanks again.

[Foreign Language]

[Foreign Language]

[Operator Instructions] I'm showing no further questions. I'll now turn the conference back to the management team for closing comments.

Thank you, again, for your time and participation. If you have any questions, please feel free to visit our website at ir.xunlei.com, or send an e-mail to our Investor Relations. Have a good day. Operator, we conclude today's conference call. Thank you.

Thank you. That concludes today's conference call. Thank you for participating. You may now disconnect.